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“There is hope that this will be reasonably short-lived”

Jesper Rangvid held a webinar on 20 April about global financial markets and the Corona virus – you can watch the recording here:

We asked Jesper
Rangvid , our world-renowned Professor of Finance and EMBA Associate Dean to give us his thoughts
on the coronavirus crisis and its impact on the financial markets. Thankfully,
he was not too pessimistic about the situation…

While the coronavirus pandemic rages around the world, it’s
bringing with it a financial crisis that’s set to have a devastating impact on
the economy. But while the International Monetary Fund (IMF) predicts that this
economic pitfall will be at least on par with the 2008 global recession,
other experts aren’t so sure. Professor of Finance Jesper Rangvid chaired a
government-commissioned investigation into the causes of Denmark’s last
financial crash, and he argues that we’re facing a different set of circumstances
that will bring about a different outcome this time.

“Firstly, and let me be clear, we are facing a very deep
recession. Hopefully it will be short-lived, but it will be very deep,” says
Prof. Rangvid. “And while that’s naturally upsetting and a difficult prospect
to be facing, there are positives that we can take from this situation.”

To understand where we are today and how it will impact upon
tomorrow, we should first look to what happened before, continues Prof. Rangvid.
“As we’re talking today [20 March], the impact on the global economy has
already been incredibly strong within a very short period of time. In fact, two
or three weeks ago, you couldn’t see any real economic warning signs and yet
today everything has been completely turned upside down. This is incredibly
fast and the stock markets have already dropped to a lower point than even
during autumn 2008.”

The EMBA Associate Dean continues: “The critical difference
is that, back then, we could see the first signs a long way off – as far back
as the summer of 2007.” And while foreseeing the future of the economic markets
is fraught with uncertainty, he believes that there are reasons for optimism.

“The chain of events is very different to previous serious
crises. During the early 30s [Great Depression] and 2008 the banks were in
trouble. So when the stock markets fell, banks fell, and when firms needed
finance, they were unable to get it from those banks. Today, it’s the opposite.
Firms have been the first organisations to face serious challenges, then the
stock markets. But banks are more robust today and should be able to ride out
the storm.”

“We know from history that banks are super important for economic activity. And if the banks are in trouble, we are all in trouble. But if we can avoid that happening – and I believe we can – there is hope that this will be a reasonably short lived, even if it will be a very deep, recession. It depends on the virus itself, but if the impact is contained within three months or so, companies will be able to avoid laying off too many staff and the economy should start to recover quite quickly.”

Similarly, Prof. Rangvid is encouraged by the strength of
the world’s financial institutions today, compared with 2008. “The important point
is that the financial system is considerably more resilient than it was back
then,” he says. “This has been one of the major learnings that will have a huge
difference upon us. In 2008, the whole situation was too fragile. Regulators
and banks have learned so many lessons and put so many systems in place. It’s a
different scenario altogether and banks have much more liquidity and more
capital. That’s reassuring.”

When it comes to our reaction to the crisis, Prof. Rangvid
is keen to see a swift and wide-ranging response from governments the world
over. He believes that their actions will set the course for what happens next.
“I actually think it’s important how governments behave; they simply have to
help firms at this stage, “ he explains. “It is very difficult for businesses
to see their revenue fall to zero and so governments have to take drastic
measures such as providing salary subsidies and so on. This will enable firms to
scale back up, restart production or restore normal operating conditions as
soon as the worst is over in – hopefully – a reasonably short period of time.
Time will be of the essence.”

“Ultimately, he continues, this is about the length of the
pandemic and that is not my area of expertise! But if it does stop within a few
months, as the medical experts argue and experience from China tells, we will
know what to look for from an economic perspective. This also means that if the
pandemic drags out, the situation might turn out to be worse than what I
predict here. It will thus be crucial whether we will be seeing signs that the
financial markets are stabilising? Do we see flattening out? Financial markets
are forward looking and they will react to how people feel and the wider
situation.”

“Future business owners need to learn how to mitigate for
and react to the natural peaks and troughs of the market; most of the time
there will be expansion but sometimes there will be drops. What are the risks
involved? Where are the opportunities? And how big are they? None of us knows
what the future holds, but it certainly pays to study what’s happened before.”